Is loan interest deductible? What the loan paid for decides
Published . Updated
What decides whether loan interest is deductible is what the money was spent on, not which property secures the loan or what the loan is called. Interest on money used to buy or run a rental can be claimed against the rent. Interest on money used for a home, a car or a holiday cannot, even when the loan is secured against the rental.
What is the rule?
The general rule in section 8-1 of the Income Tax Assessment Act 1997 lets you deduct an outgoing to the extent it is "incurred in gaining or producing your assessable income", and not to the extent it is "of a private or domestic nature". The ATO's page on interest expenses applies it to a rental: "You must separate the interest relating to the rental property from any interest on funds used for private purposes."
Does it matter what the loan is secured against?
No. The ATO's own example has a couple who borrow against their rental to buy a new home. It says they cannot claim the interest on that loan, "Even though the loan is secured against their rental property, the new home isn't being used to produce income." Borrowing against a home to buy a rental can go the other way, because the money was used to produce rent.
What does each loan show in a household's records?
In our example, a household owes a loan on its home and a loan on a rental unit. Each loan's page records what it paid for and who can claim the interest.
| Home loan | Unit loan | |
|---|---|---|
| Paid for | The home | The unit |
| Purpose | Private spending | Property |
| Balance | $445,000 | $416,000 |
| Interest claimed by | No one | The unit's owner |
| Treatment | Not deductible | Deductible |
The unit loan's interest for 2026-27 is $24,086 in the same example, and it comes off the unit's rent. The home loan's interest comes off nothing.
What if I take money back out of the loan?
A redraw is new borrowing, and it takes the purpose of what you spend it on. The ATO's ruling TR 2000/2, issued 1 March 2000, says that where the original borrowing was for income producing purposes and the funds redrawn are used for non-income producing purposes, "that part of the accrued interest attributable to the redrawn funds used for non-income producing purposes is not deductible". After that the loan has two parts, and each part's interest is worked out separately.
What if the home becomes a rental?
The ATO's example says a couple who rent out their old home "can claim a deduction for the interest charged on the $25,000 loan for their original home, as it is now rented out." The interest counts from when the home is rented or held to produce rent.
What should I keep?
- The loan statements, so each draw and repayment has a date.
- A note of what each draw paid for, kept when you spend it, not years later.
- Separate loans, or loan splits, for the rental and the private parts, where you can.
PropRetire asks what each loan paid for, which owner claims the interest, and from when, on the loan's page. Your accountant decides what is claimed on the return.